Europe Longs for a Weaker Euro

Ever since the Euro was rolled out in 2002, champions of the currency have worked long and hard to establish the tender as a serious, strong rival to the dollar. Now many of those euro enthusiasts are growing nostalgic for the money's runtier days. Because with the dollar falling to a new record low of $1.5624 during trading Thursday, many European economists and business leaders are worried about how they'll ever be able to sell their products to customers who use dollars. The Euro sign has become an alarm for "expensive."

Commentators in Europe point out that the dollar's continued slide against most international currencies has largely been fueled by domestic American factors — notably the credit tension and business failures in the wake of the subprime crisis, and wider signs that the U.S. has or is entering into recession. But plummeting investor confidence in the American economy has only accelerated the greenback's erosion, which in a little over two years has depreciated from $1.1826 per euro in January, 2006 to Thursday's $1.56. The result is that products manufactured by companies paying euro-fixed salaries and supplies wind up in stores with dollar-denominated price tags looking prohibitively expensive to shoppers.

For example, A Dolce & Gabanna woman's watch marked down on Amazon.com France to 192.72 euros — or $300 — is hardly a bargain compared to the same watch on Amazon's U.S. site selling for $225. Why should dollar-spenders even think of shopping Europe? On the other side, the profits European companies make on dollar sales are shrunken by the time they get converted back to euros. For the euro-zone economy with a projected growth rate of only around 2% in 2008, the upshot is a major pinch on export revenues threatening to stunt growth even more.

That discomfort is especially great on companies and countries that have been slow to reform their economies — such as France and Italy, whose considerable price tags for cars, trains, airplanes, luxury goods and food products have become absolutely daunting once they've traversed the euro-dollar exchange. In places like the Netherlands, Germany, and Austria — where enormous pressure on salaries and production costs have made goods and companies more competitive in recent years — the rise of the euro has been less catastrophic, though only in relative terms. Whereas Germany has watched the plummeting dollar eat at its healthy trade surplus, France blames that slide for worsening its growing trade deficit. The consequences have been similar in both countries: as BMW warned that the 5,600 jobs it was eliminating as part of a cost-cutting plan would increase if the euro surged substantially beyond $1.50, plane maker Dassault said it might have to follow the example of other heavy manufacturers in Europe by shifting production to dollar-dominated markets to save money.

That kind of talk has mobilized political leaders across Europe — many of whom are now screaming for European Central Bank (ECB) authorities to intervene with measures to bring exchange rates back into balance. French President Nicolas Sarkozy in particular has been scathing in his demands that the ECB drop its obsession with controlling inflation and, instead, introduce measures that would allow European economies to expand faster. As part of that, the French are calling on the ECB to reduce its benchmark lending rate of 4% in much the way the U.S. Federal Reserve has in the past months. That move would not only make it easier for companies and consumers to access credit, but also decrease the higher yields investors are seeking when they pull their money out of the U.S. economy, and park it in euro-zone markets.

French officials have gone so far to suggest they'd invoke an article of the treaty the euro was founded upon allowing national governments to impose policy regarding currency exchange on the ECB. True to form, ECB president — Frenchman Jean-Claude Trichet — remains singularly unimpressed by the pressure from politicians. In an interview with the weekly Le Point Thursday, Trichet admitted being "worried by the excessive exchange rate movements". But he reiterated his inflation-fighting position that "we'll take the necessary decisions to insure price stability in the medium-term [which] is what our mandate is" — and not cave into the interventionist calls from Europe's politicians.

Meanwhile, Trichet — who in the past has been critical of Washington's uninterest in the negative consequences of its economic and monetary policies for other countries — said he'd "noted with great attention the re-affirmation of American authorities... that a strong dollar was in their economic interest." A good sign, indeed. The Bush administration once saw the decline of the dollar as a boon to U.S. industry. But with investors continuing to bail on U.S. securities and monetary markets Thursday, the question now is whether American intervention alone can turn things around — or whether European politicians and central bankers must also pile on to the euro and help get their creation back in its cage.